A group of Republicans in the Ohio House of Representatives have once again thrust the state's oil and gas severance tax onto center stage by proposing a modest increase in the rate operators currently pay for production in the Utica Shale.
The legislation would allocate the bulk of the new revenue to help fund regulatory oversight and elevate funding for the Ohio Department of Natural Resources. Introduced Wednesday by Speaker of the Ohio House William B. Batchelder and Speaker Pro Tempore Matt Huffman, the bill has earned the endorsement of the Ohio Oil and Gas Association (OOGA), which called it a "sensible modification" to the existing severance tax based on actual well economics.
The proposal also earned the attention of environmental groups and other policy hawks, who were embroiled in a debate earlier this year that found Gov. John Kasich proposing a rate hike that would have bolstered the state's income tax reduction fund (see Shale Daily,June 11). For months, those on both sides of the aisle debated the best strategy for raising the state's oil and gas severance tax, with arguments spilling over about how to generate additional revenue, where to spend it and how not to impede some of the economic benefits of the shale boom in Ohio.
"We credit the Ohio house for proposing a severance tax increase. We also give them credit to dedicate most of that revenue to oversight and regulation of the industry, such as making sure orphan wells get plugged," said Jack Shaner, senior director of legislative and public affairs for the Ohio Environmental Council (OEC). "It's superior to the Kasich proposal in that regard, he wanted to use additional funds for personal income tax relief. Now, there are some things we're struggling with, there is a tax reduction, for instance -- not quite half but close -- on the tax rate for vertical drilling."
According to the Ohio Department of Taxation, under current rates, operators pay 10 cents per barrel of oil and more than 2 cents per Mcf of natural gas produced. More than $10.2 million in severance taxes were paid during fiscal year 2012, most of which came from natural gas production.
During negotiations for the state's biennial budget, approved in June, Kasich put forward a proposal to tax high-volume horizontal wells at a rate of 1% for gas and 4.5% for oil and natural gas liquids and condensate, with a reduced rate recommended for the first year of production. His proposal failed, and Kasich has continually mentioned that the state must tax operators at a higher rate so all of the state's residents can benefit from the Utica Shale play.
This year’s debate harkens back to 2012 when lawmakers also broached the subject (see Shale Daily, March 1, 2012). Kasich’s ongoing comments have kept the issue in the limelight, creating what OOGA has called uncertainty for operators surrounding the state's tax climate.
"If passed, the package would also provide much needed clarity for oil and gas producers who have already invested heavily and plan to invest billions more to explore the state's Utica Shale formation," said Thomas Stewart, executive vice president of OOGA. "The ongoing debate about increasing the severance tax has created an air of uncertainty within the industry. Resolving this issue will allow the oil and gas development to flourish in eastern Ohio."
Although the legislation calls for a smaller increase in the severance tax than did Kasich's proposal, it's being billed as a more holistic approach to some of the concerns voiced earlier this year.
It would require a 1% severance tax to be collected on the net value of oil, natural gas and liquids from unconventional wells during their first five years of production. That rate would increase to 2% percent after that period and swing back to 1% when the wells begin to hit a production decline. At the same time, the bill would decrease higher taxes on oil and gas royalties -- a major bone of contention during earlier debate -- and reduce taxes for conventional drillers.
"This tax reform proposal is a comprehensive, carefully constructed piece of legislation that incorporates many important aspects of oil and gas exploration," Batchelder said in a statement issued at the bill's unveiling.
He added that House Bill 375 provides "much-needed clarity about severance taxes and regulations, but [it] also [takes] significant steps to protect the environment and ensure that energy exploration in Ohio is safe and responsible."
Even though the bill offers a severance tax increase, it would allow operators to claim a credit on the amount they pay, Shaner said. The OEC has a problem with that concept because it would allow producers to get at least a portion of the collected tax back. Shaner said an early analysis of the numbers shows that $1.7 billion of revenue could be generated over the next 10 years under H.B. 375 rates.
"At that rate you'd see a big jolt in revenue," Shaner said. "But questions remain, and there's going to need to be a thorough analysis before we have any more thoughts on this."